Opinion: U.S. economy readies for liftoff

Editor’s note: This column is an excerpt from the UMB Bank Economic Forecast for 2015.

After several years of slow-growing momentum in the U.S. economy, we have termed 2015 the year of economic liftoff.

Liftoff is a term the Federal Reserve typically uses to reference a transition from lower rates to a rising rate environment. But we believe for our forecast this year, this term can actually be applied broadly to the entire economy.

Let’s consider where we’ve been from a growth perspective. The U.S. has been stuck in a below potential, moderately growing economy since 2009. Most recently, we saw 2.2 percent real or inflation-adjusted gross domestic product growth in 2013 – followed by a small improvement to 2.4 percent growth last year. So it shouldn’t come as a surprise that we anticipate additional improvement in 2015; but will this be a low-altitude liftoff near 2.7 percent or something more powerful, closer to 3.1 percent growth?

There are a few factors that carry more weight than others. In analyzing data, the key is understanding the difference between the signal and the noise.

This year, we think the primary driver of growth will be the consumer. We think there will be three key variables to watch that should drive consumption and economic activity: The labor market, consumer confidence and credit.

1. The labor market. Jobs are one of the most telling and powerful variables in the economic formula, but most of the time headline unemployment is the only data indicator used in reporting. That’s not as significant as one might think. We prefer to hone in on actual job creation or payroll growth because it tells more of the story.

The U.S. has seen marked improvement in average monthly payroll growth since 2011, and with that, GDP has correlated nicely. In 2013, approximately 194,000 jobs were created per month (GDP at 2.2 percent); in 2014, the number was 246,000 (GDP at 2.4 percent) and we anticipate the labor market will stabilize or improve slightly, increasing to somewhere around 250,000 per month in 2015. Historically speaking, when the U.S. creates 3 million jobs a year, the economy grows faster than 3 percent.

So what tells us this will likely come to fruition? One of our favorite signals to forecast payroll growth is availability of credit. Businesses need to know credit is available prior to expanding and hiring workers. Banks’ willingness to lend and payroll growth are highly correlated by as much as 85 percent.

2. Consumer confidence. It has been improving, and we think it will continue to improve due to the labor market, stock and home prices, and, of course, lower energy costs. The employment landscape is in excellent condition and on an upward trajectory. Pair that with a stock market that is up over 200 percent the last five years and home prices up 30 percent over the last three years, and we have a formula for upward movement. When consumers feel good, they consume.

3. Credit. It makes the world go round, and banks and credit are the lifeblood of the economy. The millions of Americans who were cut off from credit in recent years will soon regain access to credit. From 2006-09, nearly 5 million Americans, roughly the population of metropolitan Atlanta, defaulted on their mortgages. When you default on a loan, you are cut off from credit.

Fast forward seven years after a default and that blemish has been expunged from your credit record, thus giving millions of Americans access to credit once again. With that, demand for bank loans has improved significantly. In 2007, loan demand was growing just shy of 10 percent, then dried up during the Great Recession, and resurfaced to nearly 8 percent in 2014.

In other words, consumers and businesses are willing to borrow and consume yet again.

This year, we anticipate GDP growth between 2.7 percent and 3.1 percent. This will be supported by a robust labor market as businesses create new jobs, and we estimate nearly 250,000 jobs will be created on average per month. This will drive unemployment down to 5.5 percent and many discouraged workers will return to the workforce.

The economy is certainly prepared for a liftoff.

KC Mathews is a chartered financial analyst and executive vice president and chief investment officer of UMB Bank in Kansas City. The bank operates two Springfield branches.